3 Reasons Why Finance Should Adopt Lean Principles and Tools

There is a lot of discussion on what the Finance function must do in order to become an enabler to the business and remain relevant in today’s increasingly complex business environment.

From business partnering to leveraging new technologies, streamlining processes, retraining and coaching Finance teams to focus on the higher-value-add activities, and dynamically shaping the business model to ensure the company remains market relevant now and in the future – the list is endless.

All these key enablers fall into either one of these categories. People, technology or systems and processes. All three are essential for the successful transformation of the Finance function into a value-add business partner. It is no secret that the ongoing technological transformation is changing the role of Finance for the better.

However, even if an organization manages to acquire and implement state of the art technology, the full potential of that new technology will not be reached as long as the other two vital ingredients are missing from the equation.

Talented, motivated, empowered and committed people are the driving force behind any successful transformation efforts or the adoption of a new business model. At the same time, well-defined and standardized processes are needed to maximize value creation and ensure the business is not wasting time and resources on non value-adding tasks.

As business partners increasingly call on Finance teams to help them make better operational and strategic decisions and ultimately create value, it is imperative that Finance teams get the basics right, reduce the time spent on low value adding activities and channel resources to tasks with the potential of improving productivity gains.

Taking a Lean approach and applying its principles and tools can help CFOs optimize Finance processes, reduce and/or eliminate waste, free up human resources from non-value adding work, and redirect them to tasks that are more engaging and create more value for both internal and external customers.

Lean Makes Areas of Waste Visible

Although the concept of Lean has its roots in the manufacturing sector, its principles are also equally applicable in the service sector with positive results. Lean is a process improvement technique used to create customer value, identify value-added activities, simplify process flows and eliminate waste that does not create value.

Today, a number of Finance functions are burdened with inefficient Procure-to-Pay, Order-to-Cash, Record-to- Report, and FP&A processes thereby hindering their progress of becoming an effective business partner.

By applying Lean thinking to the Finance function, CFOs are able to identify and eliminate sources of waste (Transport, Inventory, Motion, Waiting, Over-production, Over-processing, Defects and Skills) and streamline processes.

Taking Procure-to-Pay as an example and applying Lean thinking to the process, the eight wastes of Lean are:

Transport: This is associated with the movement of people, products and information across the organization. Sometimes the handling or movement is too much resulting in wasted efforts and energy. Applied to Finance, an example would be the excessive number of manual approvals or decision points a supplier invoice has to go through before it gets paid, some of which are unnecessary but a duplication of efforts.

Inventory: This is excess Work in Progress that mounds up between work stations, which is a result of imbalanced demand and supply. An example of this are invoice backlogs pending processing as a result of incomplete or inaccurate supporting documentation or absent invoice payment authorizers.

Motion: Unnecessary movements by people which do not add value. A case in point is movement of people between departments chasing for invoice approvals or missing supplier information.

Waiting: Time wasted while waiting for parts, information, instructions or equipment. Applied to P2P, an example would be the procurement administrator sitting idle because he/she is waiting for invoices from other departments, or multiple invoices piling up in a tray waiting to be approved by a department head delaying the next step in a process.

Over-production: This relates to producing, processing or making more than what is immediately required. An example of over-production within the context of P2P is the creation of vendor reports that are not used or at worst, considered useless by business partners.

Over-processing: Excessive or undue process steps when a simpler approach suffices. For example, repetition of data required on the same form when on-boarding a new supplier to the system. The resulting effect is that more time is unnecessarily spent on vendor creation as opposed to say spend analytics in order to generate useful supplier insights.

Defects: Rework, scrap or incorrect documentation that requires costly remediation. Defects common in a P2P process include mixing up backing documentation of different supplier invoices, incorrect entry of invoice amount resulting in payment errors and wasted efforts trying to recover the overpayment or rectify the underpayment.

Skills: Underutilizing employees’ knowledge, skills and abilities or delegating tasks to employees with limited training. An example is using a highly-skilled and experienced professional to perform procurement tasks that can easily be automated or are considered entry-level requiring minor formal training.

Waste exists everywhere in the organization in various forms. By highlighting areas of inefficiencies CFOs and their teams are able to focus on potential improvement opportunities.

Finance Will Get a Better Understanding of Financial & Operational Processes

Not only will implementing Lean thinking help CFOs highlight areas of waste within the value chain, it also helps them develop a stronger understanding of existing business processes and their cause-and-effect relationships.

So often, companies are fixated on improving processes without first developing a better understanding of where in the process is value created or destroyed. Because processes flow across functions and departments, few people involved have comprehensive view of the end-to-end workflow, and interdependencies are often concealed.

This can result in costly inefficiencies and high error rates. A detailed analysis of the current state often uncovers significant opportunities to improve performance.

The Lean approach helps Finance organizations carry out a detailed analysis and evaluation of all the key activities and decision points involved in a process and know exactly which activity is value-adding and which is non value-adding. This in turn helps to conduct a root cause analysis for the areas of inefficiencies, challenge current ways of thinking, and prioritize improvement opportunities.

Conducting a root cause analysis is key to understanding why there are problems in the first place, so that the improvement process can focus on fixing the root causes and not the symptoms of waste. Because multiple linkages exist between the multiple stakeholders of the business, root cause analysis also helps identify possible primary and secondary causes of problems and how they are all interrelated.

Lean Embeds a Culture of Continuous Improvement in the Finance Function

The Lean approach is a continuous process improvement technique not solely focused on implementing once-off improvement initiatives and tools. Rather, it is more about driving sustainable results by building capabilities and an effective continuous improvement culture.

To achieve its business partnering objectives, the Finance function should develop a culture of learning and improvement so that employees are receptive and supportive of positive changes.

As the role of Finance continues to evolve, it is therefore imperative that Finance teams receive ongoing relevant training and coaching to ensure they are equipped with the relevant skills essential to make the Finance function better.

Transformation is a journey. Do not expect immediate results or perfection. It may take a while for positive results to materialize but what is critical is for the entire team to be positive in its approach and exhibit appropriate behaviours that signify a desire to continuously learn and improve.

One of the challenges often faced by team leaders when presented with new concepts and tools is identifying and selecting the right one. Faced with this confusion, organizations end up trying to implement all the concepts and tools in one go resulting in sub-optimal outcomes. You do not need to apply all Lean principles in your organization as not every tool is relevant to your company.

Instead, evaluate which principle and tool will be most appropriate to your business, and pilot your new methods and approach to a specific process, function or geography before implementing it enterprise-wide.

A majority of waste is left unidentified or dealt with in many Finance organizations because no one is accountable and responsible for process optimization.

By implementing Lean principles and tools, CFOs would be able to establish KPIs that are linked to value creation and promote a culture which holds employees accountable for continuous improvement, removing any inertia which may exist.